A MODEL OF BUSINESS
Business organizations exist to create value for their stakeholders. To
form business enterprise, entrepreneurs decide on an appropriate
organizational form (e.g., corporation or partnership) and hire
managers to manage the resources that have been made available to
the enterprise through investment or lending.
Due to the way resources are invested and managed in the modern
business world, a system of corporate governance is necessary,
through which managers are overseen and supervised. Simply
defined, corporate governance consists of all the people, processes,
and activities in place to help ensure proper stewardship over an
entity's assets. Good corporate governance ensures that those
managing an entity properly utilize their time, talents, and the entity's
resources in the best interest of absentee owners, and that they
faithfully report the economic condition and performance of the
enterprise. The body primarily responsible for management oversight
in corporations is the board of directors. The audit committee,
consisting of members of the board, oversees the internal and external
auditing work done for the organization. Through this link, and
through the audit of financial statements (which can be seen as a form
of stewardship report), auditors play an important role in facilitating
effective corporate governance.
Management, with guidance and direction from the board of directors,
decides on a set of mission, vision, and goals, and from these they
come up with objectives, along with strategies designed to achieve
those objectives. The organization then undertakes certain processes
in order to implement its strategies. The organization must also assess
and manage risks that may threaten achievement of its objectives.
While the processes implemented in business organizations are as
varied as the different types of businesses themselves, most business
enterprises establish processes that fit in five broad process categories,
sometimes known as cycles. The five categories that characterize the
processes of most businesses are the revenue process, the purchasing
process, the human resource management process, the inventory
management process, and the financing process. Each process
involves a variety of important transactions.
The enterprise must design and implement accounting information
systems to capture the details of those transactions and must design
and implement a system of internal control to ensure that the
transactions are handled and recorded appropriately and that its
resources are protected. The accounting information system must be
capable of producing financial reports, which summarize the effects
of the organization's transactions on its account balances, and which
are used to establish management accountability to outside owners.